12/10/2012

The Reverse Mortgage Loan – Going Once, Going Twice

Thefederal government is proposing to make big changes to its reverse mortgageprogram early next year that should make the (reverse mortgage) loans safer forseniors who use them to tap home equity.

In a response to the speculative loan market, we have seenincreased regulation in the banking and loan industries. Yet the structure ofone type of loan has gone relatively unchanged in that time - the reversemortgage loan.

A reverse mortgage is a special type of home loan that allowshomeowners to convert a portion of their home equity into cash. The equity youbuilt up over years of making mortgage payments can be paid to you tosupplement your income.

According to the Department of Housing and Urban Development,reverse mortgages are a safe plan that can help older Americans supplementSocial Security, meet unexpected medical expenses, and make home improvements.Unfortunately, riskier loan structures are making reverse mortgagesincreasingly dangerous. In response, the federal government is planning to takea more conservative approach when evaluating new reverse mortgage loanapplications. This means reverse mortgage loans will be harder to acquire incoming months.

For purposes of estate planning, the reverse mortgage is an ideaworth exploring. In practice, when your home is no longer used as a primaryresidence, the cash, interest, and other finance charges from the reversemortgage loan must be repaid. However, all proceeds beyond such amounts owed onthe reverse mortgage belong to your spouse or estate and no debt is passedalong to the estate or heirs. This makes the reverse mortgage option anappealing idea for older homeowners who may need supplemental income, but hopeto avoid passing on debt to family members.

If you or your loved ones are concerned about needing additionalincome during the coming months, reverse mortgages are worth discussing withyour family and estate planning attorney before lending standards become toostrict.